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Taking tax-free cash

There’s a great deal of flexibility about how you use your pension savings. You can set up a regular income, take lump sums as and when you need them, or go for a combination of the two. No matter which option you choose, you will probably be able to take 25% of your pension savings as tax-free cash.

While the main aim of a pension is to give you an income throughout your retirement, you have the flexibility to take out lump sums whenever you want from the age of 55 – and, in most cases, up to 25% of the total value of your pension can be withdrawn tax free.

How you make a withdrawal

There are several ways you can take money out of your pension, depending on what you need and what you’re planning to do in retirement:

  1. Just take the tax-free cash – you take out a tax-free lump sum (typically 25% of your pension) and leave the rest invested until you decide to make more withdrawals or set up a regular income.
  2. Take less than the tax-free allowance – if you don’t need all your tax-free cash, you don’t have to take it all at once. Just withdraw as much as you want and whatever is left can be taken later. If your savings rise in value, this could mean you could take a larger total amount tax-free.
  3. Take more than the tax-free allowance – you can take as much out of your pension as you want, all the way up to its total value. Just remember that anything over the tax-free allowance will be subject to tax, as if you had earned it from a job.
  4. Take out a lump sum, with 25% tax free – this is technically known as an Uncrystallised Funds Pension Lump Sum (UFPLS) and it means 25% of your withdrawal is tax-free, with the rest taxable as if you had earned it from a job.

Want to know more about these options? Download our guide

A couple of questions to ask yourself first

Taking cash from your pension may sound appealing, but there are two questions it’s worth asking yourself first.
 

  • Do you want to keep building up your pension? If you do, you’ll probably want to consider options 1 or 2 above. This is because if you take a taxable payment from your pension, your annual allowance (the total amount you can pay into pensions with the benefit of tax relief) will be cut to just £4,000 a year. This is known as the money purchase annual allowance and it can make it much harder to build up your savings in future. Our factsheet has more information.
  • Will you still have enough for your retirement? You could have many years of retirement to look forward to, so taking out too much too early could cause problems for you down the line. 

A few more things to keep in mind

  • If your pension savings end up being worth more than £1,073,100, you could face a lifetime allowance tax charge on anything you withdraw over this amount.
  • If you have several pensions (which is not unusual if you’ve changed jobs during your career), you could consider bringing them together to make life easier.
  • If you’re not sure about taking tax-free cash, please remember you don’t have to. You can leave your money invested until you’re more certain about your plans.
  • If you die over the age of 75 without using your full tax-free cash allowance, your beneficiaries may have to pay tax on the money.
  • Taking tax-free cash is just one aspect of how you can use your pension savings. We have lots of information to help you with your income options.

Want some help?

Converting your pension savings into a retirement income could be one of the biggest financial decisions you ever make. It’s really important you understand the options available to you and how they could affect your income in the future. If you are in any way unsure what would be best for your personal circumstances, you should speak to an authorised financial adviser. You can find an adviser through the Government's MoneyHelper website or on unbiased.co.uk

In addition, the government’s free and impartial Pension Wise service, another part of MoneyHelper, offers guidance on your options at retirement. This is available online, over the phone or face-to-face. Visit pensionwise.gov.uk or call 0800 138 3944.

Ready to take the next steps?

If you call us on 0800 3 68 68 68, we can tell you more about the options for withdrawing money from your pension and start the process for you. We may also be able to refer you to our specialist retirement service, which can provide advice tailored to your particular circumstances.